ASFMRA: Biofuels and energy independence in uncertain times

Thirty-five years ago this month, President Richard Nixon declared the country would be energy independent in a mere seven years. Obviously, that didn't work out, but economist Joe Outlaw says it wasn't a bad idea then and still isn't.

“It's easy for people to be cynical — ‘Energy independent? We can't do that’ — but my point is every little bit helps as long as the economics and a business model support it,” said the co-director of the Texas-based Agricultural and Food Policy Center at the recent American Society of Farm Managers and Rural Appraisers annual meeting in San Antonio.

The “whole complex” of biofuels is “tremendous. Lots of people say I'm a biofuels apologist. What I am is a realist. I don't care what anyone says, we're going to have biofuels in this country. The politicians want it. For the most part, consumers want it.”

What really matters is the economics.

“At the end of the day, I'm an economist. Economics matter, but I'm not going to try and convert the rest of you. It doesn't matter if I like ethanol or biodiesel or the people producing it. If they can't make money doing it, they won't be in (the business) for long.”

When the economics turn south, as they did with biodiesel recently, “people say, ‘Well, this is fine, but I'm not going to lose money on every gallon I make.’ They'll sit back for a while and come back when the price moves back in their favor.”

Even in such an environment don't be dissuaded, cautioned the economist. Biofuels, in some form, are here to stay.

Back to the 1980s?

Since 1960, domestically manufactured liquid fuel supply has remained relatively steady. Consumption, however, has remained on a steady track northwards. Referencing a chart showing a large gap in domestic supply and demand, Outlaw said, “Sure, this is last year's chart and won't show that prices got so high this year we used less, but it still shows the trend. Frankly, it tells all you need to know: we need more fuels and we probably don't need to be so picky about where they come from.”

Many are comparing the current situation with ethanol to the early 1980s. At that time, “we had over 100 ethanol plants and then we went to 12. Well, a lot of people think we'll go back there. I can tell you that the circumstances are completely different.”

For one thing, the United States is “more motivated to produce our own fuels for a number of reasons — 9/11 and other things. But the main difference is when (Congress passed) an RFS (Renewable Fuel Standard) that says ‘We'll blend this much of these types of fuels.’ That's a game-changer in this arena. It makes everything different.”

Outlaw said while he doesn't agree with everything the Department of Energy does, he does believe when it comes to funding research “they have a good approach, saying, ‘We don't know what technology — cellulosic production and other stuff — going forward will be the winner. So we'll fund a whole lot of different things.’”

Food prices rise

Earlier this year, a debate raged across the country on the cause of food price increases. After releasing a study titled “The Effects of Ethanol on Texas Food and Feed,” the AFPC found itself in much demand. Outlaw was even called to speak before the Senate Energy Committee for the first time. Why? “Because we came out with some results that showed you can't blame ethanol solely for what's happened with food prices.”

Unfortunately, biofuel proponents and news stories then cited the report as saying ethanol was blameless. However, that isn't what the authors stated. Ethanol was one of “many other factors that needed to be talked about.”

Among the things the report actually said were impacting food prices:

Strong global economic growth.

Weak dollar relative to many foreign currencies. “I don't think anybody would tell me I'm wrong. When you had a weak dollar it made our very expensive corn very cheap and we were exporting more last year at all-time high prices then ever before. You knew the value of the dollar was encouraging that.”

Recent crop problems (like wheat).

Increased volume of trading in commodities by funds.

Biofuels.

Higher energy prices.

The timing of the report's release coincided with the Texas governor asking for a Renewable Fuel Standard (RFS) waiver. “So, it looked like the state's major agriculture institution was coming out against his waiver request. That isn't right — there were things in the report that supported the waiver and things that didn't. We tried to be balanced.”

Policies

Outlaw then showed a long list of government policies and statements regarding biofuels since the 1970s.

“Most people forget that the blender's credit was put in place in the 1970s. It's been around for 30 years and no one really cared that much because we didn't produce that much. Now that we're producing something like 9 billion gallons times 51 cents, that's a chunk of change and people” are paying attention.

The “big thing” that pushed biofuel production was the Energy Policy Act of 2005 which installed a Renewable Fuel Standard. Even at lower levels that weren't binding “that started the trend where we're at now. It also didn't hurt that (President Bush) talked about ethanol in the 2006 State of the Union.”

In 2007, with the second energy bill — the Energy Independence and Security Act — the RFS “were extended way up and talked about other types of fuel.”

The 2005 act “basically capped corn-based ethanol. It only went to 2012, but it was going to stay flat. Now, we'll jump up to about 15 billion gallons (out of a 36 billion gallon total) by 2022 and cap it there.”

A “big chunk” of the 36 billion gallons, “will come from advanced fuels. Some will be cellulosic biofuels or biomass diesel; however you want to get there.”

No link

A surprise to some, there isn't strong linkage between the prices of crude oil, ethanol and biodiesel. Why is that? “Because when you have a fuel like ethanol that is used by oil companies when they feel like it, when it's in their favor to use it, it isn't a one-for-one price link.

“What's happened in the last year, or so, is crude oil (prices) have gone up and down and biodiesel has been all over the place. Ethanol has been relatively flat. All have been going down recently.”

Looking at contract highs for the current year, “we're well over $7 lower on beans and wheat. Looking at the corn crop, the USDA says it won't be much different than the one they said we'd have when the price was $8. So there's a whole lot of speculation in this deal.”

Livestock

When the AFPC's report on food prices came out, Outlaw's “biggest task” was “explaining it to our livestock industry. They said, ‘Joe, we can't pay $6.50 for corn and make any money.”

When the report was released, “we called all the commodity organizations in the state and said we'd get a room in Austin and tell them about the study so they didn't hear about it secondhand.”

There was much agreement when “we pointed out that feed costs were killing our feeding industry — $172 per head expected losses in Texas feed yards. The cattle feeders were nodding. But when we said you couldn't blame ethanol for all this, the same people said, and this is a quote, ‘I can't believe that someone that's so right about (the $172) could be so stupid about’” ethanol's lack of blame.

“People's emotions were running high on the issue. We did a lot of work looking at actual production costs. Everyone was blaming the farmer for these high prices, saying they were getting too much for their commodities.

“But in fact, they hadn't even harvested those crops yet. And they couldn't use the futures market when elevators wouldn't give forward contracts.”

The media talked about high commodity prices, “but no one was ever able to capture those. We even had high cotton prices for a couple of weeks. No one got them because no one could afford the risk exposure on margin calls. So, we had to do a lot of explaining.”

During the report's fallout, the only call Outlaw “really enjoyed” was from a reporter in Dallas “who asked if ethanol was driving up the bread price. I said, ‘What do you think we make bread out of?’ ‘Corn!’ ‘No, you need to fix your story. It's actually wheat. We do have cornbread, but that's a different thing.’”

One of the things Outlaw pointed out is while distiller's grains are a great feed “with inclusion rates, you just can't replace it one-for-one with corn. There are certain feeding percentages that must be used. And it's all where the ethanol is and cattle don't tend to be there. There's a geographic distribution problem.”

However, the bigger issue with the distiller's grains is the price, which was expected to remain cheap. In fact, the price followed corn. While it may have been more readily available in some areas than corn, “it wasn't as cheap as it was made out to be.”

The future

While he admits a lack of knowledge regarding biofuel manufacturing processes, Outlaw is certain there are “really smart people who will soon crack the (cellulosic) code, whether enzymatically, using gasification or chemical processes. It will happen.”

Outlaw actually bought stock in a company claiming a process that derived fuel from wood. The claims proved overblown. “If anyone wants to give me a quarter, they can have these shares of stock I purchased. I'd be money ahead based on what they're worth now.”

Even so, “someone will do it. But I don't know how soon. The chemical part is only one part of the problem.”

Transportation of biomass is another part of the puzzle. Delivering 2,000 trucks of biomass to a plant daily “will make the road a little busy.” Outlaw has heard from those who seem eager to convert corn-based ethanol plants to cellulosic. Even now, “they have a lot of trucks come in — but not 2,000 trucks a day. It will be a logistical nightmare.”

And too many times people are getting ahead of the available technology.

“At a producer meeting not far from here, a producer stood up and said he was going to stop growing 3,000 acres of cotton and switch to sweet sorghum. He'd heard a guy talk about the potential of sweet sorghum and he was going to get in on the ground floor. But he hadn't been told it wasn't ready yet — there's no market, no seed.”

Outlaw was the one “to break the news that (the producer) wasn't going to be the first rich guy in the county. I'll do that but I don't like it much.”

Portfolio of opportunities

In Outlaw's opinion, “we'll have a portfolio of opportunities going forward. I can't tell you who's got the answer. But it's annoying when someone comes up and says, ‘This is what we're going to do, this is the way it's going to be, and it's going to work and you've got tell everyone.’ That's annoying because, at the end of the day, no one (yet) knows” how it will shake out.

“People shouldn't have their feelings hurt if the (energy source) they've put their money in, or the one they think should happen, isn't the one that turns out to be the long-term winner.”

During his testimony before the Senate Energy Committee, the most valuable question asked of Outlaw was, “So we get cellulosic ethanol. What happens to corn-based ethanol?”

“I said, ‘Well, Senator, assuming the government doesn't change a lot of the things you do, it's all going to be driven by economics: the cost of production of corn-based versus the cost of production of these other things. If they're very close, we'll have both. If one is a lot higher than the other, we won't have it. That's just the way the market works. That doesn't mean I like it but that's the way the world works.’”